BP Ruling ‘Wakeup Call’ as Risks Mount in Oil Search

Sept. 4 (Bloomberg) –- Pavel Molchanov, an oil and gas analyst at Raymond James, and Bloomberg’s Alix Steel discuss a federal judge's long-awaited ruling that may force BP to pay billions of dollars more for the 2010 Gulf of Mexico disaster. They speak with Pimm Fox on "Taking Stock.” (Source: Bloomberg)

A U.S. judge’s watershed ruling means the final cost to BP Plc for the 2010 Gulf oil spill may eclipse $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into more dangerous areas such as deeper waters and ice-bound Arctic fields.

Yesterday’s court decision that BP acted with gross negligence in the Gulf of Mexico disaster may hamstring the company financially as the industry’s search for resources becomes more expensive and dangerous. Companies including Exxon Mobil Corp. and Royal Dutch Shell Plc are also facing increasing pressure to show investors they can still grow as production declines.

As producers scour the globe for oil and natural gas, the ruling shows they’ll be held accountable for mistakes that may be inevitable given the complexity of the work, said Edward Overton, professor emeritus at Louisiana State University’s department of environmental sciences in Baton Rouge. While the judge has yet to rule on how much oil was spilled, a key factor in determining additional fines, millions of barrels of crude from the well harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands.

If $50 billion isn’t “a wakeup call to do it right, to slow down, to make sure all your i’s are dotted and t’s are crossed in terms of safety -- not just for BP but also for the industry -- I don’t know what is,” he said.

The Deepwater Horizon offshore oil rig burns in the Gulf of Mexico, on April 21, 2010. Photographer Jon T. Fritz/MCT via Getty Images Close

The Deepwater Horizon offshore oil rig burns in the Gulf of Mexico, on April 21, 2010.... Read More

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The Deepwater Horizon offshore oil rig burns in the Gulf of Mexico, on April 21, 2010. Photographer Jon T. Fritz/MCT via Getty Images

Chasing Oil

The companies have little choice in the chase for big, new discoveries as access to resources continues to be limited. Exxon, BP, Shell, Chevron Corp. and Total SA earned more than $1 trillion in total profit during the past decade, almost all of which has been spent in the search for new pools of oil and natural gas.

Since 2004, the five companies have tripled capital spending and their combined output has fallen by 1.4 million barrels a day, according to data compiled by Bloomberg.

Problems have arisen as companies drill deeper and in more perilous conditions. Shell last week submitted a plan for drilling in Alaska’s Arctic, after a vessel ran aground in 2012. The ultra-deep Davy Jones well in the Gulf, among the most expensive ever drilled, has yet to produce what operator Freeport-McMoRan Copper & Gold Inc. has said may be trillions of cubic feet of gas.

The complexity of deep drilling or navigating Arctic waters means that further accidents may be inevitable, said Ed Hirs, an energy economist at the University of Houston.

Photographer: Saul Loeb/AFP via Getty Images

A support ship transitions through a sheen of oil as workers try to stem the flow of oil off the coast of Louisiana, June 12, 2010. Close

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Photographer: Saul Loeb/AFP via Getty Images

A support ship transitions through a sheen of oil as workers try to stem the flow of oil off the coast of Louisiana, June 12, 2010.

“People may say this will never happen again, but it probably will, although it will happen in a different way,” said Hirs, who also founded his own production company. “It happened again in space travel, which is similar in complexity and scale.”

Co-Defendants’ Responsibility

U.S. District Judge Carl Barbier found that BP’s exploration unit acted with gross negligence in the case, which killed 11 men and fouled beaches from Texas to Florida. The company, which has spent more than $28 billion in response to the disaster so far, will be exposed to as much as $18 billion in additional government fines and penalties.

While co-defendants Transocean Ltd. and Halliburton Co. weren’t found to be grossly negligent, the judge ruled they do share in the responsibility.

“Offshore drilling is high risk, and it leads to environmental disasters that can overshadow the financial benefits in the blink of an eye,” said Jacqueline Savitz, a vice president of U.S. oceans for advocacy group Oceana.

‘Strongly Disagrees’

Since deep-water drilling in the U.S. resumed in 2011, BP and its peers have returned to the Gulf of Mexico, where the company is seeking to drill deeper and at higher pressures than before. Gulf oil output rose to 1.3 million barrels a day in May, the highest level since 2011, according to the U.S. Energy Information Administration.

Photographer: Andrey Rudakov/Bloomberg

Robert "Bob" Dudley, Chief Executive Officer of BP Plc. Close

Robert "Bob" Dudley, Chief Executive Officer of BP Plc.

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Photographer: Andrey Rudakov/Bloomberg

Robert "Bob" Dudley, Chief Executive Officer of BP Plc.

BP said it “strongly disagrees” with the ruling against BP Exploration and Production Inc. and will appeal immediately.

“The finding that it was grossly negligent with respect to the accident and that its activities at the Macondo well amounted to willful misconduct is not supported by the evidence at trial,” the London-based company said in a statement.

BP fell 5.9 percent to 455 pence at the close of trading yesterday in London, the biggest drop in more than four years. The shares traded 0.8 percent higher to 458.50 pence at 9:14 a.m. local time today. Halliburton declined 1.5 percent to $66.55 and Transocean decreased 0.8 percent to $37.76 at the close in New York yesterday.

Legal Uncertainty

“This opens the window for a worst-case scenario to play out, although this will likely drag out for years,” Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis, said of BP. “The legal uncertainty and unrest in Russia are overshadowing the company’s operations in a significant way.”

For Chief Executive Officer Bob Dudley, appointed to deal with the accident’s aftermath, the finding means no resolution to the company’s U.S. troubles as he grapples with being the largest foreign investor in Russia at a time of mounting sanctions against Vladimir Putin’s allies.

BP may be saddled with a decade of continued legal battles, including claims from the five Gulf states and private party plaintiffs who weren’t part of a $9.2 billion settlement. Appeals may extend the final outcome -- Exxon paid the final punitive damages from the 1989 Valdez spill off Alaska 20 years after the incident.

Once one of the biggest and most powerful oil companies in the world, BP faces years more of uncertainty that will put continued pressure on shares, which have lagged competitors since the spill.

Payout Scope

Today’s ruling defines the scope of the ultimate pollution fines, which will be determined after a trial scheduled to begin in January in New Orleans. If Barbier agrees with the government’s spill estimate of 4.2 million barrels, the payout could ultimately be as high as $18 billion. If he sides with BP’s estimate that only 2.45 million barrels spilled, it could reach $10.5 billion.

“The buck stops during a spill at the door of the operator,” said William K. Reilly, who co-chaired the presidential oil spill commission. “For BP, it turns out to be a much bigger buck than most analysts expected.”

To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Harry R. Weber in Houston at hweber14@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Michael Hytha at mhytha@bloomberg.net Tina Davis, Carlos Caminada

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